What is credit life insurance and do you need it?

Be honest … do you always read every word of the fine print in the contracts you sign? You probably have this type of insurance and don't even know it.

Very few of us read the legalese in contracts. And those who do take the time to read each line might not necessarily understand the meaning. So, you can spend hours online poring over definitions, you could hire a lawyer to laboriously go over your contracts with you, or you can simply ask questions until the answers make sense to you.

Don’t be afraid to do this. As the adage goes: “There is no such thing as a stupid question.”

One thing to look out for when you’re signing for any kind of credit - retail store cards, credit cards, personal loans, vehicle finance and home loans - is credit life insurance.

One thing to look out for when you’re signing for any kind of credit - retail store cards, credit cards, personal loans, vehicle finance and home loans - is credit life insurance.

Heard of credit life insurance? Possibly not.

However, you’ve probably signed up for it several times in your life if you have any type of credit agreement with any financial services provider.

What is credit life insurance?  

Essentially, it is insurance that protects you, the consumer, if you are unable to make payments for a number of predetermined and often common reasons on your credit loans. However, if most people don’t know what it is they don’t know what they can claim for!

Another source of confusion is that it could have a different name on every contract you’ve signed: it's called debt protection, credit cover, asset cover or credit life insurance, to name a few.

It is important that you ask about this cover before signing any important documents. While most people agree to have it included in some form, many don’t fully grasp what is included, how it works, or what your rights are.

What does it cover?

The key word here is “life”. You’re probably assuming this is just to cover your debt in the event of your death, right? Wrong.

According to Switch2 Credit Life, a division of the financial services provider Clientèle Life, this type of insurance is in place to pay off a consumer’s debt in the event of “death, disability, terminal illness, retrenchment, unemployment or other insurance risks that impair the consumer’s ability to earn an income or meet their debt obligations”.

In fact, divisional CEO of Switch2 Sasha Knott says that 80% of its claims are in the case of a client’s retrenchment.

“Everyone thinks this insurance is just in the case of death, but the vast majority of our claims are because of retrenchment,” she says. “And in some cases, your debt can be paid off completely if you have good credit cover.”

What are your rights?

Another common misconception is that you must accept the contract that is in front of you.  Credit life insurance is optional in the sense that the credit provider can stipulate that you must have it, but they cannot dictate that you purchase their option.

“Credit life insurance is a really good product, but many people are paying too much. It’s essentially the consumer’s prerogative to choose their own credit life insurance that offers the most suitable benefits to them, at a competitive cost,” Knott explains.

What kind of cover can you expect to potentially receive?

In the event that you are unable to work for a period of time, whether you’ve taken ill and are physically unable to work, you are taking maternity leave, or you have been retrenched from work, you will be able to claim from your credit life insurance. Whatever amount is approved will be paid directly to the lender.

For example, if you were to be hospitalised for a week or more, you could potentially receive up to a full monthly instalment on your debt. When you take maternity leave, whether you have given birth or legally adopted a child, your debt payments could be covered in full for up to two months. If you are retrenched from your job, your debt payments could be covered for up to a year if you become unemployed or unable to earn an income through no fault of your own. If you do claim because you were retrenched, the benefit will fall away when you are employed again and earning an income.

How much will be paid in any of these circumstances is, however, dependent on the type of package you have with your chosen service provider.

What does this cover exclude?

There are, of course, limitations to what you can claim as well as how often you may make a claim. In terms of disability or maternity cover, you can only claim once for each of these within a 12-month period with Switch2, for example.  

There are also some circumstances for which you cannot make a claim. For example, you may only make a retrenchment claim if you were unaware that you would be retrenched and if you were dismissed through no fault of your own.

You may also not claim if: the loss of income or retrenchment is related to an unprotected strike; if you received sufficient notice of your retrenchment; if you resign, retire or choose to accept a voluntary retrenchment or redundancy package or termination of employment; or if you elect to not work.

For more information visit: www.switch2.co.za or e-mail info@switch2.co.za or call  087 700 0022.